Trump's tariff threats upend markets despite Treasury pick reassurance

Wall Street woke up relieved on Tuesday morning. Donald Trump had named Scott Bessent, a veteran hedge fund manager with orthodox economic credentials, as his Treasury secretary. Analysts immediately began drafting reassuring notes. Rodrigo Catril at NAB called Bessent "a safe pair of hands" and suggested he might actually moderate the president-elect's more extreme impulses. Bloomberg reported that Bessent's previous comments about tariffs being a negotiating tactic meant China might get some breathing room. The Dow Jones climbed one percent. Treasury yields fell. For a few hours, markets believed they had dodged the chaos.

Then Trump posted on Truth Social. Within hours of the US market closing, while analyst notes were still arriving in inboxes, the president-elect announced he would impose a 25 percent tariff on all products from Mexico and Canada effective January 20th. He cited drugs flowing across the border. He also promised an additional 10 percent tariff on Chinese goods, on top of whatever other tariffs he might impose, until China stopped what he saw as unfair trade practices. The Australian share market turned negative. US stock futures fell. The Australian dollar weakened as investors rushed into US currency.

It was a reminder, as Elliot Clarke at Westpac noted, that cabinet picks matter far less than the man holding the pen. "It's had an immediate effect on the Australian dollar and that plays on our psychology," Clarke said. The whiplash was real enough that some observers felt transported back to 2018, when Trump's trade announcements arrived without warning and markets lurched daily. "He hasn't taken office yet, so this is just the starting point," Clarke added. "We will have to see how all the Trump policies work together, but the fact we're already seeing announcements tells you this will be a period of uncertainty."

Capital Economics offered a blunt assessment: Trump's cabinet exists to execute his vision, not constrain it. "Following his comprehensive election victory this is Trump's world, while the rest of us, including his cabinet, just live in it," the firm wrote. Paul Ashworth, Capital Economics' chief North America economist, noted that Trump and his inner circle had spent four years planning their return and would likely be more effective from day one than they were in his first term. With a Republican sweep of the presidency, House, and Senate, Trump had the political mandate to push through trade and immigration policies that previous administrations had considered too radical. His cabinet nominees would be expected to stay loyal and carry out his policies precisely.

Australia's exposure to these tariffs is indirect but significant. The US is not a major market for Australian exports, so direct tariff impacts would be limited. But China is Australia's largest trading partner, and a trade war that weakens China's economy would ripple directly through Australian demand. Commonwealth Bank economists noted that the larger damage would come through second-round effects: slower Chinese growth leading to reduced demand for Australian coal, iron ore, and other key exports. The Reserve Bank had already begun analyzing this scenario before the election. Internal RBA briefing documents, released under freedom of information laws, showed that central bank staff had modeled both "extreme" and "moderate" versions of a Trump trade war. In both cases, weaker Chinese growth would put downward pressure on Australian economic growth and the Australian dollar.

The RBA's analysis suggested that an extreme trade war scenario—the kind Trump appeared to be signaling—could force the central bank to cut interest rates earlier than it otherwise would. Slower export demand and reduced growth would be disinflationary, putting pressure on policy rate expectations and government bond yields. The RBA had considered the possibility of an "unrestrained Trump" as a scenario worth planning for. Within hours of Bessent's nomination, that scenario stopped being hypothetical.